Page 149 - Internal Auditing Standards

Guide to Using International Standards on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts

Some of the potential risk factors with regard to related-party transactions are set out below.

Exhibit 12.1-1

Description

Overly Complex Related parties may operate through an extensive and complex range of relationships
Transactions and structures.

Relationships and • Related-party relationships may be concealed, as they present a greater
Transactions not opportunity for collusion, concealment, or manipulation by management.
Identifi ed
• The entity’s information systems may be ineffective at identifying or summarizing

transactions and outstanding balances between the entity and its related parties.
• Management may be unaware of the existence of all related-party relationships
and transactions.

Not Conducted in Related-party transactions may not be conducted under normal market terms
the Normal Course and conditions such as above; below fair values; or even with no exchange of
of Business consideration at all.

Management is responsible for the identification and disclosure of related parties and accounting for the
transactions. This responsibility requires management to implement adequate internal control to ensure that

transactions with related parties are appropriately identified and recorded in the information system, and
disclosed in the fi nancial statements.

The auditor is responsible for maintaining an alertness for related-party information when reviewing records
or documents during the audit. This includes the inspection of certain key documents, but does not require
an extensive investigation of records and documents to specifically identify related parties.

In smaller entities, these procedures are likely to be less sophisticated and informal. Management may not
readily have information about related parties (the accounting systems are unlikely to have been designed to
identify related parties), so the auditor may need to make inquiries and review accounts with specifi c parties,
etc. beyond the accounting records and disclosures in the accounts.

Financial Reporting Frameworks

Because related parties are not independent of each other, many financial reporting frameworks establish

specific accounting and disclosure requirements for related-party relationships, transactions, and balances.

This enables the users of financial statements to understand their nature and actual or potential eff ects on
the fi nancial statements.
Where the applicable financial reporting framework establishes requirements for related-party accounting

and disclosure, the auditor has a responsibility to perform audit procedures to identify, assess, and respond
to the risks of material misstatement arising from the entity’s failure to appropriately account for or disclose
related-party relationships, transactions, or balances in accordance with the requirements of the framework.

Where the applicable financial reporting framework establishes minimal or no related-party requirements,
the auditor still needs to obtain a sufficient understanding of the entity’s related-party relationships and

transactions to be able to conclude whether the financial statements, insofar as they are affected by those

relationships and transactions:
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